What is an Art Business Worth?

How do you determine the value of an art business? I thought I'd share some basic findings which are not so basic considering how opaque the art industry can be. I think it bears mentioning that almost all art businesses are private companies - meaning their financial reports are not publicly available - and finding such data can be difficult.

WHAT (AND HOW) TO MEASURE?

My two primary sources were BizBuySell and BizComps. Through these data sources I wanted to answer the following questions:

What is the asking price for an art business?

How much would a buyer be willing to spend?

BizBuySell is a website that compiles businesses for sale in certain categories. I used the "museums, art galleries and zoos" category to find current businesses for sale. I decided to throw out businesses that were not art related (such as zoos!) and was able to find 48 businesses for sale in art retail and art services.

BizComps is a paid subscription service that compiles a list of sold businesses in certain standard industrial classifications (SIC). An art gallery belongs to the SIC of 5999, a miscellaneous retail classification of which art gallery is a subset. Through BizComps I was able to find 11 sold art businesses since 2002 in the SIC 5999.

Examples of businesses for sale in BizBuySell

A few broad notes before presenting the findings:

Sometimes the sale of an business may include up to 1/2 to 3/4 of its value in its inventory.

An art business is often self-calculated with an estimate on its intangibles or intellectual property.

This category is weighted heavily in “fine art” and accompanying retail and services. It’s not appropriate for design or manufactured art products.

FINANCIAL FINDINGS

So, here's the data. The average asking price for an art business was roughly $274,000 and the median was around $150,000. This higher average asking price is abnormally skewed over the median because of two large asking prices for a body exhibit and telephone museum (a collection is essentially a big inventory) at $2.5 and $1.2 million respectively. However in the end, the average businesses sold for $154,000 and the median sale was $117,000. This lower sale price means that most businesses probably had their asking price haggled down or reduced over time - or only the best bargains were purchased.

We see a similar purchasing strategy in revenues - only the more profitable businesses were sold in the end. The average revenue (annual gross) of businesses for sale was $338,000 and median was $253,000; but revenue of sold businesses was averaged at $601,000 with a median of $447,000.

But what does this mean without comparing to the price that the business would sell at? Profitability is related to how much you invest. So I then calculated the asking price over the annual gross - which is essentially how many years will it take for revenue to equal the cost of buying the business. This proportion was less than a year in businesses for sale, about 11 months on average and 5 - 6 months on median. Again the sold businesses have a much faster recouping time - around 3 - 4 months of revenue to meet the sale price.

However, using gross revenue can be misleading since some businesses have less overhead and are more profitable than others, so I also calculated profit over the asking price (called the seller's discretionary earnings or SDE). SDE is a more useful denominator since it tells us how many years in profit it will take to pay off the cost of the business. Asking price over SDE was 3 years 2 months on average and 2 years 4 months on median, which is a pretty sad investment. Taking 3 years to pay off just the cost of buying the business - let alone expanding it - is nothing the average investor should jump at. Looking at the businesses that actually sold, we see that it was around 1 to 1.5 years for profits to equal the sale price.

In practical terms, many of these businesses would probably take on a 5 - 10 year loan of around $100,000 and that's going to be a $1,000 - $1,200 monthly payment. Most of these businesses for sale have weak numbers and I also highly question the veracity of some claims of revenue on Bizcomps. However, it does make perfect sense that the actual businesses sold on BizBuySell had healthier profits and revenues compared to their price.

OTHER FINDINGS

Did you know the average art business (for sale) is over 20 years old? I averaged the established dates of the businesses listed on BizBuySell and 1993 is the average established date (1996 was the median). Perhaps the skewing towards older businesses on BizBuySell is that younger businesses will straight up close their doors instead of trying to sell the business. I definitely think that potential buyers would more interested in businesses that have established themselves (and their clients) over a decade anyway.

I also tried to calculate the average staff for a business (using full time as 1.0 and half time as 0.5). I calculated that the average art business for sale has 2.5 employees (median was also 2.5). I think we can extrapolate that at least one of these employees is the owner since most small businesses are a sole proprietorship or partnership. This doesn't surprise me much given the small scale of most art businesses and the bevy of solo enterprises. Globally the average art company size is 5 people (this includes large institutions), but my findings were half that size.

I also found that an incredible 10 out of 48 businesses for sale were willing to do seller financing. The range of seller financing was broad as well; whether it was a tiny $35k operation to a $1.5m company, the businesses were 21% likely to help finance the sale. For those late in their years business owners, there may be a non-financial desire to see their passion and their clients continue into the future. But what does this portend for the business owner who self-finances this? This could mean payments over many years. Could an ailing business owner allow a 20 year financing option? Certainly not a balloon payment, right?

When it comes to assets, only 5 of the 48 businesses for sale were attempting to sell real estate and 37 of the 48 listed inventory for sale with the business. As I mentioned before, inventory can make up a substantial amount of the asking price of a business (in dubious cases 100% of the asking price). The sale of real estate or inventory in a business is a dubious proposition. In one perspective assets are stronger since they are tangible and hopefully liquid (this might help the chances of a business loan). On the other hand, the business needs to be competitive and shouldn't have its sale price wrapped up completely in assets, but rather some intangible competitive advantages like client relationships or brand recognition.

LIMITATIONS

Please don't draw too many conclusions from this report. It should be noted that the distinctions between industries are often blurred and frustrate attempts to generalize. “Art” is often attached to a product or company to heighten its value.

Even within the art industry there is trouble distinguishing between business types. Galleries and art services are often blurred due to multiple revenue sources. For instance, many frameshops often have small galleries and many galleries will offer consultation services.